positive externalities

• Positive externalities


  Benefits to third parties as a result of the actions of a separate agent
• Positive externalities in consumption

  • Benefits are to third parties as a result of the actions of consumers
• Positive externalities in consumption

  • Healthcare - being vaccinated against the flu
  • Education - individuals getting educated
• Third parties


  Economic agents not involved in the transaction or the activity at all
• Individuals are educated


  Rest of society benefits because individuals will be more productive, have higher incomes, pay more tax, which can be used to provide socially desirable things
• Individuals exercise and eat healthy


  Employers benefit from higher productivity of their workers
• Diagram for positive externalities in consumption

  • Marginal social benefit is higher than marginal private benefit
  • Free market allocates at private optimum (Q1, P1)
  • Social optimum is where MSB=MSC (Q*, P*)
  • Welfare loss is the triangle pointing towards the social optimum
• Positive externalities in production


  Benefits to third parties as a result of the actions of producers
• Positive externalities in production

  • Firms offering high-quality in-work training schemes - other firms can poach trained workers
  • Firms engaging in R&D - other firms can copy the new technologies
• Diagram for positive externalities in production

  • Marginal social cost is lower than marginal private cost
  • Free market allocates at private optimum (Q1, P1)
  • Social optimum is where MSC=MSB (Q*, P*)
  • Welfare loss is the triangle pointing towards the social optimum
• Producers and consumers ignore the external benefits, leading to under-production and under-consumption compared to the social optimum, resulting in a misallocation of resources and welfare loss